Buy or Rent – Which is Better For You?

August 5, 2010

Renting vs buying is a major decision; whether you rent vs own a home can have an impact on your family’s life for years down the road.

With some of the best mortgage rates in years and deals to be had on homes in a down real estate market; if you’re renting you might be thinking about buying a home. Before you buy, make sure you look at the total costs of owning a home and how it fits into your overall financial picture.

The Big Picture

The decision to rent vs. buy is an important financial decision due to the sheer amount of money most of us spend on housing, but don’t think of it only in terms of the interest rate and the amount of the monthly payment. Whether to rent or buy is only one part of a complete financial picture – in some regions, housing prices might make buying and all its requisite tax benefits a better deal. In others, it might be better to rent and put the extra expenses related to property ownership in other investments or toward other purposes.

The bottom line – the decision to buy or rent doesn’t exist in a vacuum. It should always be tied to other factors – lifestyle, community, and where your personal investments stand. And many lenders are now sticking to the guideline that you shouldn’t spend more than 28 percent of your monthly income on a mortgage payment.

Cost of Renting vs Cost of Buying

That said, there are some interesting resources that have surfaced to help you start the decision-making process. A website called Trulia and research from the Center for Economic and Policy Research in Washington, D.C. have reported their opinion that homes are fairly valued in a city when they cost about 15 times a year’s rent. In simpler terms, if you’re spending $18,000 to rent a place and the house costs more than $270,000, then think twice about buying.

Rent vs Buy Calculator

The New York Times also has an interesting rent vs buy calculator that’s worth checking – it goes beyond what prices are doing in an area and adds other factors like how long you plan to stay in your home. The calculator can help you determine the total cost of buying a home and offers a year by year analysis of your costs.

Understanding the Neighborhood

If you’re seeing pricing capitulation in a neighborhood you really like, it’s going to be a tighter call between renting and buying. But if a neighborhood takes a turn for the worse or you see an opportunity to move somewhere else, a renter can make a move much quicker than an owner.

Home Owner Responsibilities

The condominium movement has created a class of homeowners who never have to trim a bush or mow a lawn, but they obviously have to pay for those services. Renters don’t have to care about painting a home or paying an assessment – they don’t have ownership, but they have freedom. And with a look at motivation and financial considerations, it’s possible to make a more informed decision.

Costs of Buying a Home

Assuming you can’t pay cash, it costs money to get a mortgage — closing costs can run into the thousands at the start of the game. A financial planner can help you detail the typical financial outlay at the start of home ownership and advise you on how not to get into spending trouble once you get the keys.

Risks of Buying a Home

Homeowners today understand risk as never before. Most have seen the value of their property stagnate or fall in the past three years. As with any investment, the question with homeownership is the same – can you handle the risk of an extraordinary drop in value? If not and other factors work, it might be better to rent.

Lifestyle Impact

Lifestyle means different things to different people, but renting can be a relatively low-headache lifestyle with the right property. It also allows for relative freedom to move and away from the financial responsibilities that come with ownership. People often say that if you expect to live in a community for a short time, renting might be the best choice; age is also a factor. In addition the high cost of home ownership may limit travel, lifestyle or other opportunities. Only you know what will be the best indicators based on your life situation.

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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

Comments

9 Responses to Buy or Rent – Which is Better For You?

I think the question becomes more is if the Real-Estate that goes up in value is more than what you can make with the money that is tied into the house, and the second point is only valid when you assume that eventually the people will buy a house. What if they just rent for their whole life into retirement, then decide to move into something like a retirement home? Or they save up enough over the long term to just buy a house outright without having to pay any sort of interest and thus not worry about interest rates?